pb4uski
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
I'm pretty sure that we have talked about that before in other threads.
I like "the fritz method". I wish I'd thought if it.
Ok, a little curve ball on this method of IRA to Roth conversion.
It's that you technically took a cash distribution (the taxes), and put that amount in the Roth (from another source) within the 60 day window allowed - which would fall under the once per year rollover rule. As such you would be limited to one in a 365 day period.
Ok, a little curve ball on this method of IRA to Roth conversion.
Spoke with a person who told me that he didn't think that you could do more than one conversion per year utilizing this method.
The issue isn't that you can't do more than one IRA to Roth conversion during the year and have Vanguard withhold/pay the Federal tax to the IRS.
It's that you technically took a cash distribution (the taxes), and put that amount in the Roth (from another source) within the 60 day window allowed - which would fall under the once per year rollover rule. As such you would be limited to one in a 365 day period.
Long story short (if he's right), multiple conversions utilizing this method would not be allowed - only one per year...
It would be hard to verify multiple conversions this way IMHO, as I believe Vanguard reports your conversions/taxes as one lump sum on your tax forms. An IRS audit might bring out the issue.
Would appreciate any input on this issue from forum members using this method. Anyone doing multiple Roth conversions and having their investment company withhold/pay their Federal taxes, and putting that amount in their Roth within the 60 day window from another source?
So you're saying the contribution that covers the withdrawal amount isn't considered part of the Roth Conversion but some other kind of rollover, so it is subject to the one rollover per year rule? Doing this wouldn't preclude additional "direct" Roth conversions or rollovers in the 365 day window where this method wasn't used, right? (sorry, I'm still coming to terms with some of the terminology).
I'm planning on doing a Roth 401K to Roth IRA conversion soon, which shouldn't involve any taxes or withholding, I hope I haven't precluded that now.
So you're saying the contribution that covers the withdrawal amount isn't considered part of the Roth Conversion but some other kind of rollover, so it is subject to the one rollover per year rule? Doing this wouldn't preclude additional "direct" Roth conversions or rollovers in the 365 day window where this method wasn't used, right? (sorry, I'm still coming to terms with some of the terminology).
I'm planning on doing a Roth 401K to Roth IRA conversion soon, which shouldn't involve any taxes or withholding, I hope I haven't precluded that now.
The way way that I understand it is, I think, that you can do multiple Roth conversions if they are all considered direct transfers.
The issue, I suspect, is that when the conversion is implemented via a 60-day rollover where you take possession of the cash (Tax withholding would fall into this category.). When you try to replace the cash within 60 days you are using one of your rollovers.
In this case you make likely run afoul of the 1 per year rollover rule because this strategy was using a rollover to implement a Roth Conversion.
Personally, I still have funds in a 401k, so hopefully if I need a second rollover, I could accomplish that via a 401k --> IRA 60-day rollover that is not limited to once per year.
-gauss
I did a Roth conversion in Dec 2020 and had the taxes withheld. I want to do a rollover in Jan 2021 to put that money into the Roth.
Does it matter if you did the conversion in 2020 and the rollover in 2021?
I'm having trouble getting someone at Schwab that understands. I think the best so far (maybe the correct way?) is to put the money into the tIRA and then do another conversion with that amount. This would be done in 2021. Does that create an issue since I did the original one in 2020?
Fritz, thanks so much for following up on all of this, I think I'm going to copy you reply into my taxes folder for reference just in case there's any flack from the IRS. It will be interesting to see how it all plays out for me and I'll respond back here if there's any hiccups, but it certainly looks like you've nailed it all down here.
I'm thinking the original subject of this thread is quite a misnomer, wish there were a way to change it.
I agree that using other assets to essentially make the conversion "complete" within 60 days is fine -- the whole amount will count as having been converted.The thread relates to the idea of doing a Roth conversion and having federal income tax withheld and then within the 60-day window depositing from other sources the amount withheld into the Roth as an "indirect rollover". So for example, one would do a $10k Roth conversion with $2k withheld in federal income tax and then within the 60 day window deposit $2k of money from other sources into the Roth... so $10k ends up out of the tIRA, $10k ends up in the Roth and $2k is paid in tax to the feds.
The nuance of a difference between doing this and just a $10k Roth conversion with no withholding and separately making a $10k estimated payment is that the $10k withheld is considered as having been paid ratably over the year for prepayment penalty purposes.
On this thread there are also questions on the 5 year rule for conversions. I understand that the IRS sees Roth conversions as FIFO (first in - first out), and co-mingling of funds really isn't an issue (as they see it). But I plan on doing Roth conversions annually until it's all converted, or the other scenario happens. Plans might change if the govt. tax game board changes (again), but have to go the direction dealt currently.
Given "you" have a 5 year time frame for any Roth conversion withdrawals w/o 10% in penalties (and being +59.5 yrs age) - I thought to do annual Roth conversions into my existing Roth account, and place each year's conversion funds into a specific separate Mutual fund for the 5 years. This would be for isolating the conversions for timing and preventing commingling of conversion funds and earnings. I see this as important for heirs, as the 5 year rule is not forgiven upon the death of the original owner, but understand the 10% penalty is forgiven for all heirs.
Also understand heirs would be responsible for taxes on "earnings only" for all withdrawals of conversions not meeting the 5 year rule. This could affect up to five conversions under timers. Spouse has the rollover option, and my children/grandchildren beneficiaries (not falling under the special circumstances for stretch IRA rules) have 10 years to remove the funds.
They have the option of holding the funds until the original 5 year timers are met, or paying taxes on the earnings since the conversions. Holding them in separate funds until the 5 year timers are met should greatly simplify things for them tax-wise, should the other scenario happen and my heirs (other than my spouse) inherit the account. Am I looking at this correctly?
I think mostly so, with one major note of caution.
When determining contributions and conversions with IRAs, the IRS looks at dollars, not how those dollars are invested inside the accounts.
Suppose you do a Roth conversion of $10,000 in 2021 and put it all in mutual fund X. Five tax years later in 2026, suppose the value of those mutual fund shares is now $17,000. You may only withdraw $10,000 (the dollar value of the conversion in 2021) from your Roth IRA tax- and penalty-free, not the $17,000 (the value to which the investment had grown). The additional $7,000 worth of shares would be considered earnings, which are last in the Roth ordering rules and would come out order-wise after any 2022, 2023, 2024, and 2025 Roth conversions, and would be subject to penalties and maybe taxes if withdrawn before 59.5.
Yes, after reaching age 59.5, converted amounts can come out penalty-free regardless of the 5-year window.I am not sure if one can remove conversions faster than the five year timeline implies without penalty after age 59.5. It may be so.
That's correct. The money is accessible. And it would not be subject to ordinary income tax. It would be subject to the 10% penalty, unless the distribution is for a qualifying reason (e.g., you are age 59.5, deceased, or disabled) or the distribution meets one of the other exceptions to the 10% penalty (e.g., it's used to pay for qualifying higher education expenses).If you withdraw enough fast enough to where you are withdrawing conversion amounts before they have rested for five years, I am not sure what happens exactly but I think the 10% penalty applies. If you want to call that "frozen", I suppose you could, but I wouldn't think of it that way - the money is accessible, there may just be penalties due.
Yep.After you have removed all contribution amounts and conversion amounts, then the IRS deems that you are taking out earnings (that's the only thing left). Earnings removed before age 59.5, as I noted before, may be subject to taxes and penalties. I am 99.9% certain that earnings removed after age 59.5 and five years after your first Roth IRA was opened are both tax and penalty free.
The 10% penalty is waived simply because the owner has passed away and the distribution is being made to the beneficiary or to the owner's estate. Doesn't matter if the 5-year rule was met, nor does the deceased owner's age matter.For inherited Roth IRAs, I believe that the ordering rules still apply but that there may be relief from the 10% penalty if the original owner had opened their Roth IRA more than five years ago and was over 59.5 when they passed away.